What

to Know For Midterm 2:

Chapter 5: (multiple choice)

Ratios & Equations:

Gross Profit = *Net Sales COGS

* Net Sales = Sales Revenue Sales Returns & Allowances Sales Discounts

Gross Profit % /Margin = Net Sales COGS = Gross Profit



Net Sales Net Sales

COGS = Cost of Goods Available for Sale (COGAS) Ending Inventory (EI)
** Remember you can determine EI with this equation, too.

COGAS = Beginning Inventory + Cost of Goods Purchased

Periodic Vs. Perpetual Inventory Systems:

- Periodic: we record COGS at the end of the period
- Perpetual: we record COGS after each sale

Journal Entries:

- Most likely wont be tested; however, I recommend knowing the following in
case you are asked for a particular calculation:

(on p. 253) for both perpetual and periodic!

1. Purchase of merchandise on credit
2. Sale of merchandise on credit
3. Payment on account with a discount
4. Cash received on account with a discount

- Understand the accounts! (multiple choice)
o Definitions, normal balances
o Used in Periodic and/or Perpetual?

Interchangeable Terms:

- Gross Profit % = Gross Profit Margin (this is not profit margin ratio)

Try these problems! BE5-7,9; E5-1, 7

Chapter Six:

Ratios & Equations:

Inventory Turnover Ratio = COGS / Average Inventory

Average Inventory = (beginning inventory + ending inventory)/ 2

Days in Inventory (just incase) = 365 / Inventory Turnover Ratio

COGS = Cost of Goods Available for Sale (COGAS) Ending Inventory (EI)

COGAS = Beginning Inventory + Cost of Goods Purchased

Wtd-Average Unit Cost = Cost of Goods Available for Sale (COGAS) / End. Inv. (EI)

Terms of Sale: (multiple choice)

EXAMPLE: If Nordstroms sold a pair of TOMS to a customer online...

- Under FOB Shipping Point:

o Ownership of the shoes passes to the customer once the TOMS boards
the delivery truck

- Under FOB Destination Point:

o Ownership of the shoes remains with Nordstroms until the TOMS
arrive at the customers doorstep

- Keep in mind whether the company is the seller or buyer

- Consignment: (might appear in multiple choice)
EXAMPLE: If Crossroads Trading Co. is selling Nordstroms TOMS on
consignment the ownership of the TOMS still belongs to Nordstroms

The Three Inventory Methods: (except Moving Average under Perpetual)

Tip: To avoid mixing up FIFO and LIFO

For FIFO, think of a bathtub. Water is added starting from bottom to top. So,the
water at the bottom is the first to leave the tub.

For LIFO, think of a water pitcher. Water is added starting from bottom to top.
But, the water at the top is the first to leave the pitcher.

Under Periodic (recording COGS at the end of the period) .

Tip: Find the total units sold, total units available for sale, and total units
in ending inventory before starting the problem

1) FIFO: earliest goods purchased are first to be sold for total sales made in period

2) LIFO: latest goods purchased are first to be sold for total sales made in period

3) AVERAGE COST: applies a weighted avg unit cost to total units sold and in EI

Step 1. Determine the weighted average unit cost
Step 2. Wtd Avg Unit Cost x Total Units Sold = COGS
Wtd Avg Unit Cost x Total Units in End Inv = End Inv

Under Perpetual (recording COGS after each sale) .

Tip: make sure information is in chronological order (Jan, Feb, March..)

- Focus on one sale at a time when determining COGS
- Start with the first sale made in the period when determining COGS

1) FIFO: earliest goods purchased are first to be sold for each sale

2) LIFO: latest goods purchased are first to be sold for each sale

Effects of the Cost Flow Methods:

If you like memorizing here:

EI

COGS

COGS

EI

COGS

EI

EI

COGS

FIFO LIFO FIFO LIFO

Arrows pointing up = increasing prices
Arrows pointing down = decreasing prices

Ask me about the logic behind this if you dont understand!

- Understand that COGS is an expense
o Expenses decrease Net Income on the Income Statement

Try these book problems! BE6-2, 3, 10, Do-It!6-1, E6-3, 5, P6-2A, 3A, 5A, 8A,
9A

Chapter Seven:

Internal Control (multiple choice):
- Fraud: we are concerned with Opportunity b/c a workplace can prevent
opportunities from rising from the get-go with good Internal Control
-
- Use your intuition for these problems

- Read over:
o Primary components of Internal Control
o The Principles
o Limitations

Bank Reconciliations:
BANK


BOOKS
Beg. Balance
Beg. Balance
+ Deposits In Transit
+ Note Collections
- Checks Outstanding
+ Interest Revenue
+ / - Bank Errors
+/- Electronic Funds Transfers (EFTs)

- NSF Checks

- Bank Service Charges/ Fees

+/ - Book Errors
Adjusted Bank Balance =
Adjusted Book Balance

** Adjusted Bank Bal. & Adjusted Book Bal. ALWAYS balance! If you calculate
one, you know it is ALWAYS equal to the other sides adjusted balance.

- If you are asked to prepare a bank reconciliation, you must show both the bank
and book adjustments!

- If you are asked to determine an adjusted balance (either cash or bank),
show your work for whichever adjusted balance is asked for.

- Understand these adjustments! The information may be worded differently, so
it is up to you to correctly identify the adjustment and which side it effects

Adjusting Journal Entries: (ONLY prepared for book adjustments!!!)
- You may be asked to prepare AJEs in the Bank Rec problem, so study AJEs for:
o Collections of N/Rs
o Book Errors
o NSF Checks
o Bank Service Charges

Interchangeable Terms:
- Deposits In Transit = Deposits Outstanding

Try these book problems! BE7-8, DO-IT! 7-3, E7-3, E7-6, 7, 9, P7-3A, 4A, 5A

Chapter Eight: (read instructions carefully for every problem!)

Equations:

Interest = Face Value x Annual Interest Rate x Time (yrs, 12 mos, 360 or 365 days)

Cash (Net) Realizable Value = A/R Allowance of Uncollectible/Doubtful Accts
** This is always the same before and after a write-off! **

For Notes Payable ..

Maturity Value = Face Value of Note + Interest

Maturity Date Know the knuckle trick, unless you know how many days are in
each month of the year

Journal Entries:

1. Recording a write-off
2. Recording a collection on a write-off (remember to reverse the write off first)
3. *Recording estimated uncollectibles (know this JE!!)

Methods for Recording Uncollectible Accts:

1) Direct Write-Off
- I advise you learn the journal entry to compare to the Allowance Methods

2) Allowance Method
- allows A/R to be stated at cash (net) realizable value

Write-Offs:

- We consider some amount to be uncollectible (deduct from A/R) from some
customers A/R account (deduct from Allowance for Uncollectibles Account)

- Always have a net zero effect on the cash (net) realizable value
o Why? They decrease both Accounts Receivable and Allowance for
Uncollectible Accounts
o This is why the write- off journal entries & T-accounts are helpful!



Methods for Estimating Uncollectible Accts:

1) Aging the A/R
- Know how to complete an aging schedule (follow format on pg 405)
- In the last row, you will see Total Estimated Uncollectibles or
Total Estimated Bad Debts ; dont worry, they are the same here.
- You solve for estimated uncollectibles

2) Percentage of Receivables
- Balance sheet approach
- Determines uncollectibles as a percentage of A/R
- You calculate the estimated uncollectibles when given the % of A/R but
solve for bad debts expense.

3) Percentage of Sales
- Income statement approach
- Determines uncollectibles as a percentage of sales
- You calculate the bad debts expense when given the % of sales but solve
for estimated uncollectibles.

*Make sure you know how to use the T-account for Allowance for Uncollectibles..

ALLOWANCE FOR UNCOLLECTIBLE ACCTS ( T ACCOUNT)
Beginning Balance (if a debit)
Beginning Balance (if a credit)

Bad Debts Expense (% of sales)

Estim. Uncollectibles (Aging of Accts)

** Note:
- Ending balance of the T-account = Estimated Uncollectibles
- Adjustment made to the T-account = Bad Debts Expense

Interchangeable Terms:

- Allowance for Uncollectible Accounts = Allowance for Doubtful Accounts
- Uncollectible Accounts Expense = Bad Debts Expense
- Estimated Bad Debts = Estimated Uncollectibles

Try these book problems! BE8-3,4,6, 7, E8-5, 6, P8-3A, P8-5A

Chapter Nine: Depreciation (Methods, Equations..)

Equations:

Depreciable Cost = Cost Salvage Value

Book Value = Cost Accumulated Depreciation

Accumulated Depreciation = Year 1s Dep. Exp + Year 2s Dep. Exp ....
= total depreciation expense

All terms!:

- Study all of the terminology in this chapter! Its worth your time; trust me.

- Here are key words you must understand:

- Cost: an exact, given amount of all expenditures made to acquire the asset &
make ready for intended use
- How much did I pay for the washing machine itself, for shipping , etc?

- Useful Life: an estimated number of years/units of the expected life of the asset
- How many years/ how many wash cycles can I expect to get out of my
washing machine?

- Salvage/Residual Value: whatever the asset is worth at the end of its useful life

- How much is my washing machine (w/ expected life of 10 years)
worth after 10 years?

- Book Value: the value of the asset recorded in the balance sheet

- Note that the higher the accumulated depreciation on an asset is, the
lower the Book Value.

- Depreciation Expense: the portion of the asset that has been consumed or has
expired, and therefore recorded as an expense

- Depreciation Expense is determined for each year of the assets life
- Reduces net income (b/c it is an expense), but not the cash account

- Accumulated Depreciation: the cumulative depreciation of the asset up to a
specific point in its life

-
-
-
-

This is the balance sheet amount of depreciation

Acc. Dep. is a contra-asset account (deducted from PPE)
Acc. Dep. is not a cash account
It represents the total amount of the assets cost that has been
charged as an expense

- Depreciable Cost: the amount of an assets cost that will be depreciated

- It is the same amount for each method used below

The Three Depreciation Methods:

1. Straight Line: Cost Salvage Value x Time (in terms of year)
Useful Life (yrs)

Calculates the same depreciation expense for every year that the asset
is depreciated

2. Double Declining Balance: Step 1: DDB Rate = (1 / useful life) x 2

Step 2: Beginning Book Value x DDB Rate x Time (in terms of year)

- Beginning Book Value = Cost of the asset
o No accumulated depreciation on my washing machine at this
point!

- Calculate the new Book Value as you depreciate the asset for each year

- Depreciation stops when Depreciation Expense = Book Value

o The most recent book value CANNOT go below the salvage value
(the value at the end of its useful life).

If your Book Value is getting close to your Salvage Value,
you would take the difference between book and salvage
value to find depreciation expense for that last year of
useful life

3. Units of Activity/ Production: Step 1: Find the depreciable cost/unit
= Cost Salvage Value
Useful Life in Units
Step 2: Multiply depreciable cost/unit by
the units used in the year to
find depreciation expense for each yr





Partial- Year Depreciation: (only for Straight Line & Double Declining Balance)

- Watch the number of months youre depreciating the asset for each yr.

- Example: your washing machine is bought in September 2011 instead of
January 2011 (beginning of year)

o Here, multiply by 4/12 (you have depreciated the washing
machine for 4 months in 2011)

Gain & Loss:

- If you like journal entries like me, you can learn the journal entries for
gain and loss to determine the gain or the loss on the sale of the asset.

- Then again, knowing the logic below is more efficient for test-taking:

o Example: You decide to sell your washing machine in 2021 (10
years, its useful life, from 2011):

o Gain from the sale if sales > book value

I earned more from the sale of my washing machine than
what it is currently worth

o Loss from the sale if sales < book value

I earned less from the sale of my washing machine than
what it is currently worth

Interchangeable Terms:

- Salvage Value = Residual Value
- Units of Activity method = Units of Production method
- Service Life = Useful Life

Try these problems! BE9-3, 5, 8, DO-IT! 9-2, E9-4,5,18,19, P9-7A, P9-8A